“You say you got a real solution
Well, you know we’d all love to see the plan,
You ask me for a contribution
Well, you know,
We are doing what we can”
– Revolution by The Beatles
Blockchain is often associated with Bitcoin (see footnotes below for links to articles on Bitcoin). Bitcoin is a new form of digital currency. Think of it like PayPal, except you don’t have to feed the account, dollars or pounds or pesos. The backbone of the system is a software platform called blockchain. It is the blockchain that keeps track of who owns how many Bitcoins (or whatever digital currency or cryptocurrency you possess), how the currency is being transferred amongst users of that currency, along with timestamps of all transactions. The blockchain is a sophisticated database that acts as the accounting ledger.
Now, if you are like me, you might shrug at all of this. What does a digital payment system developed by computer geeks have to do with insurance? For the better part of the year, I too struggled with this. I kept reading articles about blockchain and insurance and couldn’t quite grasp how they were going to connect. It seemed like a classic “solution looking for a problem” conundrum.
And then one day, the light bulb turned on in my head.
To understand the impact of blockchain in insurance, we need to stop thinking and equating Bitcoin and blockchain as the same thing. They are different.
Bitcoin is digital currency. Blockchain is the software that enables a digital currency to exist. And blockchain does this by enabling one, simple key feature: decentralization.
Decentralization means that no one owns the platform! No one owns the ledger, the database, or the system. There is no guiding hand, auditor, inspector, or regulator. No one is managing the blockchain, yet at the same time, everyone is managing the blockchain.
In the Bitcoin platform, the full ledgers are scattered just under 300,000 sites globally. Each of these ledgers contains the full transaction history of every Bitcoin in existence. There are cute websites that allow you to see where a dollar bill has traveled, but just imagine being able to see where every single piece of currency has ever been and who owned it! Add to this, that any transaction between two individuals in the platform becomes registered across all ledgers automatically, updating balances all in real-time. Contrarily, in a typical banking transaction, a payment from you to me requires both of our banks to devote resources to verify funds and move them along, which becomes a far from frictionless process in which costs can mount (and guess who pays for those costs?) Credit card transactions take even longer to process and require even more mouths to feed in the in-between verification steps.
Decentralization of the ledger allows for near-frictionless payments in Bitcoin. This, of course, lowers costs and greatly speeds up the transaction times.
So What Does This Have To Do WIth Insurance?
It took me over a year to fully comprehend the power of the blockchain. All you need to do is read and wait a few more minutes. Bear with me.
The decentralization of the blockchain platform nearly ensures legitimacy in all transactions for Bitcoin (nearly!?? – yeah nothing is perfect). It’s open-ledger technology eliminates a whole lot of redundancy and mistrust. Hmmm…can you think of any business where there exists a whole lot of redundancy and mistrust?
If you said “insurance,” then cheers…
Take a physical property for instance. In our current paradigm, a property owner gets insurance by filling out an application (either with a broker via paper, or digitally or online). That application gets processed by the broker and/or insurance company. In order to rate the risk correctly, here are some items the underwriter would like to know:
- Is it really wood frame?
- Was it really built in 1923?
- Was the roof really updated in 2016?
- Does it really have metal, wind resistant shutters?
- Does it really have a sprinkler system? Does the system even work?
- * 100 other relevant questions
The insurer spends a lot of time, money, and resources trying to verify these answers. Year, after year, after year. And then, when the insurer passes this information along to their reinsurance broker, they do the same thing. And then when the reinsurance broker passes the information along to the reinsurers, they also devote resources to verify all of this information. This is how bad it looks:
The industry uses inspections, outside reports, auditors, and 3rd party vendors to fill in the gaps. There is no estimate of the costs of this, but it is easily in the billions, probably even tens of billions of dollars, across all lines of business globally every year. And yet, the data is still rubbish, and the distrust is as high as ever.
SO, this is the way I envision blockchain unleashing its potential in insurance:
Eliminating (or greatly diminishing) redundancy
Property assets such as cars and buildings have fairly easily identifiable owners. A simple blockchain would start with the property owner being listed on the chain (for simplicity, I have eliminated some steps). On the blockchain, proof of ownership must also be listed. So the chain starts to become public as some verifiable entity, such as the town or DMV or some other trustworthy entity confirms ownership. This is logged into the chain and can NEVER be reversed (reversing would require the simultaneous hacking of all copies of the blockchain. As the number of copies increases the likelihood of this becomes almost impossible). So now, we have at least 3 parties to the blockchain, the owner of the asset, another stakeholder to the asset, and, perhaps most importantly, there is a blockchain for the asset itself. The ledgers for all 3 parties verify ownership and dates.
So, let’s say, I wish to sell my property to someone else. We are now introducing another party to the blockchain. They will be able to verify ownership because there will be at least 3 ledgers documenting my ownership of the property. When the transaction goes through, the 3 original ledgers and the 4th new one are now updated with a new set of chains that list the transaction dates (and any other detail that needs to be listed such as a signed title or deed). My blockchain will show that I am no longer the owner of that asset, the asset blockchain will show the ownership change, and the other stakeholder will also show the transaction occurring. The new owner will then have a chain added to her blockchain showing her as the new owner. Any future ownership changes can leverage the data sitting on all of the blockchains listed. My personal and public blockchain still remains valuable in the scheme because I am one additional ledger data point that future owners can rely on to verify the chain of custody. Thus, over time, the profile of the asset becomes more and more decentralized…just like in Bitcoin.
Ok, we are ready to add insurance to the mix. Let’s say the new owner of the asset I once owned wishes to buy insurance for her asset. The public blockchain can store more than just ownership info. If the asset is a car, then all the details of the car, including VIN, color, type, age, registration info, photos, and anything else that is relevant, can and should be on the asset’s blockchain. The owner can also share her blockchain and info such as driver’s license, claims history, and other relevant data points can be shared with the insurer. The insurer can then verify ownership by examining the blockchain history, which will show my transaction with her and also the blockchain of the legal stakeholder verifying the transaction. Now, the insurer’s ledger will add a chain and be one additional ledger point verifying ownership and custody of the asset.
If coverage is bound, the insurer will add to the blockchain of the asset, the block chain of the owner, and the blockchain of any other stakeholder, the details of the insurance transaction. If any claims occur, those claims would also be added as new links in the chain, so that any future transaction involving the asset will properly document the claims history. Over time, the legitimacy of the asset and the owner of the asset gets stronger, more robust and actually antifragile.
SO what does this mean for insurance and how will this “revolutionize” the insurance ecosystem?
- The blockchain will eliminate applications – ALL OF THEM…not just paper. Just push or share your blockchain with the insurer or broker. In fact, I can envision marketing scenarios where you share the blockchains and insurers bid to insure the asset(s)/exposure(s).
- Say bye bye to repetitive inspections – The chain may require an initial inspection, but not more frequent than every once in awhile (yes I am being vague here – time will tell how frequent this should be). All work on the asset should be added to the blockchain. Updated roof? Add that to all of the stakeholder’s blockchains including contractor name, their insurer (and details on the insurance), photos etc. Imagine that after a severe hurricane it was found that the contractor used faulty nails to hold the roof down. With blockchain, the identity of the contractor, materials used, the contractor’s insurance in force and more are all seconds away from being retrieved.
- Say sayonara to certificates of insurance – It costs a ton for agencies to process them and at the end of the day, they are almost meaningless! The contractor’s blockchain will have their insurance info, prior claims, etc etc etc.
- Eliminating audits – Many lines of business require annual audits to review records. Payroll for workers compensations, sales, revenue, and lot items sold for product liability policies and inventory records for inland marine lines. With blockchain, this disappears. Payroll records between the insured company and the insurer can be linked via blockchain. Same with sales records and inventory quantities and values.
- Claims will be embedded in the blockchain of the stakeholders – no need to ask for loss runs. It’s all there. Subrogation of claims? Again, all the info is there waiting to be retrieved.
This is just scratching the surface of all of the wasted resources that we can eliminate in the insurance ecosystem. I still do not have all of the details ironed out and over time we all will find out what works, what doesn’t work, but I feel really confident that my list of 5 is the low hanging fruit.
There is actually a 6th revolutionary benefit to blockchain in insurance, and that is dealing with fraud. I will deal with that in my next article.
Articles on Bitcoin
Insert YouTube video https://www.youtube.com/watch?v=j7opj5-32hw
The Hidden Dangers of Bitcoin – insert Youtube video https://www.youtube.com/watch?v=tXBwcedQuQ0